Ocean Power Technologies, Inc. — Form 10-Q Summary
Reporting period: Three months ended July 31, 2016, the company’s fiscal 2017 first quarter. The filing was submitted September 12, 2016. Ocean Power Technologies is developing and commercializing ocean-wave energy systems, principally its autonomous PB3 PowerBuoy.
Business context
The company is pursuing autonomous offshore power applications for ocean observing, defense and security, communications, offshore wind, and other remote applications. Commercialization remains at an early stage. Government agencies historically generated a significant portion of revenue, but the quarter’s revenue was generated entirely from Mitsui Engineering and Shipbuilding Co., Ltd. (“MES”).
Key financial metrics
| Metric | Three months ended July 31, 2016 | Three months ended July 31, 2015 |
|---|---|---|
| Revenue | $202,389 | $105,666 |
| Gross profit | $75,104 | $0 |
| Gross margin | Approximately 37% | 0% |
| Product development expense | $1.64 million | $2.48 million |
| SG&A expense | $1.52 million | $1.91 million |
| Operating loss | $3.08 million | $4.39 million |
| Net loss attributable to Ocean Power Technologies | $3.83 million | $4.16 million |
| Basic and diluted loss per share | $1.72 loss | $2.38 loss |
| Net cash used in operating activities | $2.92 million | $3.12 million |
Revenue increased 92%, primarily from MES work, while operating expenses declined 28%. The company recorded a $752,069 unrealized loss from remeasurement of its warrant liability, which reduced the benefit of lower operating expenses. The prior-year quarter included $251,007 of other income from an Australian research and development refund; no comparable income was recorded in 2016.
Cash, liquidity, debt and capital structure
- Cash and cash equivalents were $9.02 million at July 31, 2016, compared with $6.73 million at April 30, 2016.
- Marketable securities were $100,000, and restricted cash was $266,125. Cash, cash equivalents and marketable securities totaled approximately $9.1 million.
- Total assets were $13.13 million; total liabilities were $9.79 million; and stockholders’ equity was $3.33 million.
- Debt and capital lease obligations totaled approximately $105,000, including $61,088 current and $44,273 long-term obligations on the balance sheet. Separately, the NJBPU recoverable grant had $25,000 outstanding and was classified as current debt in the notes.
- Financing activities provided $5.22 million, principally from equity and warrant offerings. The company issued 417,000 shares in June and 595,000 shares in July, generating combined net proceeds of approximately $5.3 million.
- The company stated that existing cash and marketable securities should fund operations into at least the quarter ending April 30, 2017, but also stated that additional equity or debt financing is required and that substantial doubt exists regarding its ability to continue as a going concern.
Material changes versus the prior comparable period
- Revenue increased from $105,666 to $202,389, reflecting MES activity rather than prior-year Department of Energy work.
- Gross profit improved to $75,104 because the prior-year revenue was associated with cost-sharing contracts that produced zero gross profit.
- Product development costs declined $846,416, or 34%, largely due to changes in PB40 and PB3 deployment activity.
- SG&A declined approximately $388,000, or 20%, due primarily to lower employee-related, legal and consulting costs, partly offset by higher stock-based compensation.
- Net loss attributable to the company improved by approximately 8%, despite the new $752,069 warrant-liability fair-value loss and the absence of prior-year other income.
- The company’s backlog increased from negligible at April 30, 2016 to approximately $0.7 million at July 31, 2016. Management stated that the backlog was fully funded.
- Stockholders’ equity declined from $3.53 million to $3.33 million despite the equity raises, primarily because of the quarterly net loss and comprehensive loss.
Operations, outlook and unusual items
- In July 2016, the company deployed its first commercial-design PB3 PowerBuoy off New Jersey. Management expected this deployment to provide final validation before a planned six-month MES lease beginning in March 2017.
- The MES agreement totals $975,587 and includes engineering services and a six-month PB3 lease scheduled to run from March through August 2017.
- The company continued PB3-A1 testing and deployments, including work with the National Data Buoy Center and Wildlife Conservation Society.
- The legacy PB40 was retrieved after unexpected performance data indicated likely failures in float-braking components. The company stated that the PB40 is not critical to its current autonomous-applications strategy and recorded related retrieval and mooring costs in product development expense.
- Management anticipated fiscal 2017 operating expenses of approximately $12 million, including more than $5 million of product development spending, subject to potential reductions if additional capital is unavailable.
- The company reported an approximate monthly net cash burn of $800,000 during the quarter, excluding the $500,000 cash payment related to the litigation settlement.
- A proposed securities class-action settlement requires $3.0 million of cash, consisting of $500,000 paid by the company and $2.5 million paid by its insurer, plus 380,000 common shares valued at $596,000 when the settlement was signed. Preliminary approval was obtained, with a final approval hearing scheduled for November 14, 2016.
- The SEC’s investigation remains ongoing. A July 2016 subpoena requested information relating to the company’s April 2014 public offering. No provision for potential losses was recorded.
Principal risks and contingencies
- Recurring losses, an accumulated deficit of approximately $181.7 million, negative operating cash flow and the need for additional financing create substantial doubt about going-concern status.
- Future equity issuance may materially dilute existing stockholders. The warrants issued in the quarter were recorded as a $2.57 million liability and may create additional dilution if exercised.
- The company has limited commercial operating history and must demonstrate the reliability, survivability, power output, manufacturability and cost effectiveness of the PB3.
- Revenue is concentrated: MES represented 100% of quarterly revenue, and changes in a small number of contracts or percentage-of-completion estimates could materially affect reported results.
- Commercial demand for PowerBuoys may develop more slowly than expected, and the company’s strategic shift away from utility-scale systems may not succeed.
- Pending derivative litigation, shareholder litigation, the SEC investigation, and Spanish tax inquiries could result in additional costs or liabilities. The filing does not provide a clear estimate of potential losses for matters not covered by the settlement.
Investor verification checklist
- Verify the final court approval and implementation of the securities class-action settlement, including the issuance of 380,000 shares.
- Track cash burn, financing activity and whether additional capital is raised before the company’s stated liquidity horizon.
- Confirm successful PB3 validation, the March 2017 MES lease commencement, and the timing and collectability of the $975,587 MES contract.
- Assess whether revenue is becoming recurring and diversified beyond a single primary customer.
- Review warrant terms, fair-value changes and potential dilution from approximately 324,452 warrants issued in the June and July offerings.
- Monitor the SEC investigation and all derivative, shareholder, employment and Spanish tax proceedings.
- Compare actual fiscal 2017 operating expenses and product development spending with management’s approximate $12 million and $5 million expectations.